CFTC charges BP unit with propane market manipulation

WASHINGTON, DC, June 29 -- The US Commodity Futures Trading Commission has charged a BP PLC subsidiary with cornering the domestic propane market and trying to drive up its price.

In a civil action filed June 28 in the federal district court for Northern Illinois, CFTC said BP Products North America cornered the market for February 2004 TET physical propane and manipulated the price.

CFTC also charged the BP unit with trying to corner the April 2003 TET physical propane market and manipulate the price.

"Cornering a commodity market is more than a threat to market integrity. It is an illegal activity that could have market repercussions for commercial market participants as well as retail consumers around the country," said CFTC enforcement director Gregory Mocek.

BP Products denied the charges. "We are reviewing what was filed, but based on our investigation of the trades we have examined to date, we have determined that no manipulation of the market occurred. That is not how we operate," it said in a statement.

It noted that the US Department of Justice also filed a criminal complaint against Dennis N. Abbott, a former employee, who pleaded guilty. Abbott, who said in a statement accompanying a June 28 guilty plea of conspiracy to manipulate the propane market, was fired for not following company policies, BP said.

TET propane is the primary propane used for residential and commercial heating in the Northeastern US, particularly in rural areas that natural gas systems do not reach, CFTC explained. The term refers to propane deliverable at Texas Eastern Products Pipeline Co.'s terminal at Mont Belvieu, Tex.

Prices for TET propane affect the New York Mercantile Exchange's propane futures contract in part because the contract provides for delivery of propane at TEPPCO's Mont Belvieu terminal, CFTC said.

Specific chargesCFTC's complaint alleged that Mark Radley, the BP division's natural gas liquids trading manager at the time, developed and executed a speculative trading strategy to corner the February 2004 TET propane market, with senior management's knowledge and consent. It said that internal company documents show that traders planned to establish a long February propane position, withhold part of that propane from the market, and drive up the price.

By cornering the market, CFTC said, BP traders allegedly sought to generate at least a $20 million profit "with potential upside from there." The alleged scheme caused the price for TET propane to become artificially high, it charged.

The strategy led to the BP products subsidiary's physical propane position exceeding the entire TEPPCO system's propane inventory, according to CFTC. "At the end of February 2004, BP owned over 88% of all TET propane," it said.

The company's dominant and controlling position let it dictate prices at which it would sell propane to short-term customers, the complaint said. It said that BP Products' action pushed the propane price to more than 90¢/gal, a level which CFTC said would not have been reached by normal supply-demand pressures.

The complaint alleged that the company tried to manipulate the TET propane market using a similar strategy in April 2003 as a trial run under Radley's direction.

BP said in its statement that based on its internal investigation, the February 2004 trading activity "did not cause an artificial price." CFTC's allegations were based on inaccurate or incomplete information and resulted from an incorrect application of the law to the cited propane trades, it said.

"All of the trades in question carried risk for BP in that money could have been lost on them. They were separate transactions," the company said.

Abbott, who the CFTC complaint said was the BP Products NGL trading manager in Radley's absence, pleaded guilty June 28 to conspiracy in federal district court for the District of Columbia. He faces up to 5 years in prison, a $250,000 fine, and supervised release following incarceration, according to DOJ's criminal division.

It said that Abbott admitted he understood the alleged scheme had been approved by senior executives and that steps were to be taken to avoid detection by market participants and others. For example, he said, traders were instructed to avoid using terms such as "squeeze," "leverage," and "corner" when describing the strategy in e-mails and telephone conversations.